TAXATION FOR DEVELOPMENT

TAXATION FOR DEVELOPMENT

I - THEORY AND CONCEPT OF TAXATION

    A. Definition and Essential Characteristics

    B. Bases and Purposes

    C. Classification of Taxes

II – DEVELOPMENT REQUIREMENTS AND TAXATION

A.    Capital Formation

B.    Redistribution of Income and wealth

C.    Allocation of Resources

D.    Economic stability

      III – THE PHILIPPINE TAX SYSTEM

A.    The Constitutional Mandate

B.    The Organizational Set-up of Major Revenue Agencies

C.    Major Taxes

1.     Income Tax

2.     Transfer Taxes

3.     Value Added Tax

4.     Customs Duties

5.     Local Taxes

6.     Real Property Taxes

7.     Exemption and Taxation

      IV – RECENT DEVELOPMENTS

A.    Developments Under the Martial Law Regime

B.    Post EDSA Revolution developments

C.    Growth in Revenue Collection

      V – ISSUES AND PROBLEMS

          A. Revenue Administration

          B. Tax Structure

THEORY AND PURPOSE OF TAXATION

1. Definition and Essential Characteristics

v  TAX – is a compulsory contribution from the person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred upon taxpayer.

v  TAXATION – is an important tool which the government employs to keep overall money expenditure for goods and services from advancing or falling too rapidly.

·         It is claimed that the most important aspects of taxation is not the amount of revenue which it produces, but its effect on the level of total money expenditure.

·         Others express more concern on whether it is really promoting equity in the distribution of income and efficiency in the allocation of resources.

·         Both the equity in the distribution of income and efficiency in the allocation of resources are equally important for developing countries like Philippines where income disparity is very much a problem and government resources are scarce.

FEATURES OF TAX cited in De Leon’s “THE FUNDAMENTAL OF TAXATION”

1. It is an enforced contribution;
2. It is generally payable in money;
3. It is proportionate in character;
4. It is levied on persons, properties or transactions;
5. It is levied by the state which has jurisdiction over the person, property or transaction;
6. It is levied by the lawmaking body of the state; and
7. It is levied for public purpose or purposes.

CLASSIFICATION OF TAXES from ECONOMICS point of view

1. Those imposed in the product or factor markets;
2. Those imposed on the seller’s or the buyer’s side of the market;
3. Those imposed on households or firms; and
4. Those that enter on the sources or uses side of the taxpayer’s account

2. Bases and Purposes

v  The existence of government (and ultimately that of the state) is a necessity since the state is considered the ultimate socioeconomic and political human organization.

Ø  The state provides the people an apparatus or machinery where they could cooperate and consolidate their resources for the satisfaction of their common needs.

Ø  The state supplies an organizational structure for the provision of social (public) goods, like national defense, parks, fire stations and the construction of roads, etc. since no private individual has the incentive to provide them on his own.

Ø  The internal and external security provided by the state enables the people to concentrate their energies more on economically productive activities and worry less in protecting their properties.

It is believed that without the state, civilization will be retarded and chaos will result, thus leaving the people at the primitive “survival of the strongest” level.

v  To justify taxes is to justify the existence of the state itself.

v  Taxes are the lifeblood of the government. (Supreme Court ruling)

Ø  The state needs resources for its operations – specifically for the support of its government.(one justifications for taxation)

TAXATION FOR DEVELOPMENT

• Taxation had been used as an instrument of directing the economy of the state to prosperity.

• Taxation has been employed to effect equitable distribution of wealth (progressivity of taxation) and to stabilize the economy (including savings or investment or employment opportunities).

• To developing countries, taxation assumes a much more important role – to hasten the economic development of the country. Tax policies and systems are formulated and implemented to support the development thrusts of these countries.

• Taxation for development is, therefore, aligned to the strategies for development which include the generation of capital for economic growth, the efficient allocation of resources for balanced socioeconomic growth, and the preservation of the economic independence and self-sufficiency of the country.

Modern theories and principles of taxation revolve around ADAM SMITH’S principles of an ideal tax system: EQUITY, CERTAINTY, CONVENIENCE, and ECONOMY.

1. Equity – prescribes that taxes must be based on the taxpayer’s ability to pay, as measured by his size of income.

Ø  The principle of equitable taxation is especially important for societies where income and wealth are unevenly distributed.

Ø  Its significance is embodied in the policy of states to advance social equity by redistributing income and wealth through tax measures.

Ø  In developing countries, where the disparities of opportunities are common, this is imperative to achieve the equal allotment of the benefits and efforts of undertaking national development.

Ø  The tax systems and strategies used to achieve such are exemplified by the formulation of a progressive and uniform system of taxation and the efforts to evolve a tax structure characterized by increasing reliance on direct taxes.

v  EQUITY therefore is achieved when those who have more are taxed more, and the same tax rate applies to subjects in similar situations.

2. Certainty – this specifies that taxpayers should know which taxes are imposed, the amount to pay, and the manner of payment.

Ø  This is necessary in order to avoid overpayment or underpayment of taxes, evasions, or discouragement on the part of the taxpayer to pay.

3. Convenience – takes into account the convenience of the place, time, and the manner of payment.

Ø  This principle demands that the government must locate its collection offices at places where they are easily and conveniently accessible to taxpaying public.

Ø  Procedures of payment must also be simple and understandable.

·         Practice of automatically withholding taxes on income

·         Practice of authorizing banks to collect tax payments

4. Economy – tax administration must not involve too much expense on the government.

·         If a tax is to be economical, the cost of its collection must be minimal, otherwise the cost of collecting tax will be greater than the revenue realized.

          

Ø  Economy in taxation also means that taxation should not exert negative influences on productive undertakings. Therefore, it should not be too high so as to discourage investment nor too low to permit diseconomies.

3. Classification of Taxes

1. As to Purpose.

§  A tax may be fiscal, designed solely for raising revenues.

§  It may also be regulatory, intended to achieve social or economic goals regardless of whether revenue is actually raised or not.

2. As to Incidence

§  Has reference to the point at which the burden of the tax is actually borne

§  This is concerned with who bears the burden of the tax

Under this category, tax may be direct or indirect

       DIRECT TAX – when the person on whom the tax is imposed absorbs the burden

       INDIRECT TAX – when the charge is paid by a person other than the one on whom it is legally imposed

·         Levied upon commodities as in VAT and is practically paid not as a tax but as part of the price of the commodity by the consumers to whom the producer passes on the burden.

3. As to Rate

A tax may be proportional, progressive or regressive

       PROPORTIONAL – when it is based on a fixed percentage, regardless of the amount of the income or value of property, a single rate being applied to different objects with different values.

       PROGRESSIVE – when the tax rate increases as the tax base increases

       REGRESSIVE – when the effective rate decreases as the tax base increases

4. As to Authority

§  A tax may be imposed by the national government as in the case of income tax or by the local governments as in the case of the real estate tax.

5. As to Object

§  A tax may be charged on personal occupation engaged in   by the taxpayers.

§  Usually, a fixed amount is imposed upon all persons of a certain class within the jurisdiction of the taxing power without regard for the value of their property or the occupation.

Examples:

o    Community tax

o    Professional tax

o    Excise tax – imposed directly by the legislature w/o assessment, measured by the amount of business done or the extent to which the conferred privileges have been enjoyed or exercised by the taxpayer, irrespective of the nature or value of the taxpayer’s assets.

6. As to Scope

Taxes under this classification may be general or specific

       GENERAL TAXES – are those imposed throughout the state for the purpose of financing general public benefits.

       SPECIAL TAXES – are those levied for a special or local purpose, for the benefit of only a part of the body politic.

Examples:

o    Special Fund Tax

o    Flood Control Tax

o    Anti-TB Stamp Tax

7. As to the Amount Paid

§  An example of this is the specific tax which is paid in fixed amount as appraised by the head or number, or by some standard of weight or measurement.

§  No assessment is required other than a listing or classification of the subject to be taxed.

DEVELOPMENT REQUIREMENTS

Ø  A responsive tax system must be able to support and promote a nation’s economic and social objectives

Ø  In a country like the Philippines, taxation has to contribute towards realizing the requirements of development namely:

1.     The generation of capital and savings necessary to economic growth;

2.     The reduction of inequalities in income and wealth for social justice and equity;

3.     The proper allocation and utilization of resources for a balanced development; and

4.     The protection of the “exposed” economy from external forces so as to attain stability and unimpeded economic growth.

1. CAPITAL FORMATION

Ø  Is considered the key to economic development

Ø  In developing countries, taxation is increasingly assigned the role of generating capital savings in an economy where capital resources are scarce.

Ø  The scarcity of capital to finance economic growth and production may be traced to the low level of income and savings, and the high propensity for consumption.

Ø  In poor countries, taxation must be able to regulate consumption in order to encourage people to save.

·         It has to provide incentives to attract the savings into productive investment.

Ø  The government steps in to augment capital investment by public spending for the overhead costs of investment as in infrastructure projects for power, transportation, communication, and the like.

·         Thus, the government has to borrow or raise more revenues from taxes.

Ø  In the allocation of resources therefore, taxation is used to strike a balance between economic and social development.

Ø  In sum, taxation for capital formation should maximize savings, mobilize them for productive socioeconomic investment and provide, where the private sector fails or refuses, the necessary revenues for social and economic infrastructures needed for development.

2. ALLOCATION OF RESOURCES

Ø  Tax measures, through exemptions and incentives, should be able to enhance the efficiency of resource allocation and maximize the benefits of allocated resources such that not only the full utilization and productivity for economic growth is achieved but also balanced economic and social development

Ø  Balanced development is achieved through taxation, when incentives and subsidies on economic sectors result in the proper mix of economic and social goods

3. REDISTRIBUTION OF INCOME AND WEALTH

Ø  Taxation for development requires that the tax system should narrow the gap of resources and opportunities

Ø  Tax system are formulated to exert a direct impact on income inequities and other inequities in the economy

Ø  Revenue administration uses tax strategies which provides tax incentives in underdeveloped sectors of the economy

Ø  The design of progressive tax system redistribute income and wealth since it taxes more those who possess greater wealth and income

Ø  Another tax strategy is the redirection of the tax structure from indirect to direct taxation

·         Direct taxes eliminate the indiscriminate shifting of tax burden even to the poor consumer under indirect taxes

·         Direct taxes like income and property taxes, apportion the tax burden according to the tax payer’s ability to pay

Ø  Finally, when taxes which are raised through a progressive tax structure are channeled towards expenditures which improve the income capacities of the disadvantaged, i.e. education, health, employment generating projects, etc. such taxes in the long run contribute to redistribution of income and wealth.

4. ECONOMIC STABILITY

Ø  A development-oriented tax system must be able to contend with the instabilities of the “exposed” economies of developing countries.

Ø  An “exposed economy” is essentially that which is highly vulnerable to world market developments which are beyond its control.

CAUSES OF EXPOSED POSITION:

·         Heavy dependence of the local economy on the export of its agricultural or mineral products as a source of national income and foreign exchange

·         Dominance of foreign investments in the economy

·         Dependence on foreign sources of manufactured products, including oil, machinery, foodstuffs and others not met by local production.

Ø  As a fiscal measure for economic stabilization, taxation should be able to:

·         Shield the economy from the negative impact of the world market forces in the short-run

·         Promote the diversification of the economy in the long-run

Ø  Specifically, taxation should employ a system of tariff controls in order to effectively regulate the flow of exports and imports with a view towards balancing the foreign exchange requirements and the competitiveness of some industries; giving the proper incentives and protection to local industries in order to promote the diversification and the self-reliance of the economy; and regulating the economic and financial activities of foreign investors.

THE PHILIPPINE TAX SYSTEM

1. THE CONSTITUTIONAL MANDATE

Ø  The Constitution expressly provides that the rule of taxation shall be uniform and equitable and mandates Congress to evolve a progressive system of taxation.

2. THE MAJOR REVENUE AGENCIES

1.     The Department of Finance (DOF)

o    The principal fiscal and administrative arm of the government

o    Responsible for the judicious and effective management of government’s tax programs and borrowings to achieve national development goals.

2.     The Bureau of Internal Revenue (BIR)

o    The premier agency in charge of all matters pertaining to internal national taxation

a.     Organizational Set Up

v  Headed by a commissioner

v  Assisted  by two deputy commissioners

b.    The Powers of the BIR

1.     Assessment and collection of all national internal revenue, taxes, fees and charges;

2.     Enforcement of all forfeitures, penalties and fines connected with 1;

3.     Execution of judgment in all cases decided in its favor by the courts;

4.     Giving effect and administering the supervisory and police power conferred to it by law;

5.     Recommend to the Secretary of Finance all needful rules and regulations for the enforcement of the provisions of the National Internal Revenue Code; and

6.     And through the Commissioner, the BIR has the following functions:

a.     Accounting for all revenues collected

b.    Exercising all legal requirements that are appropriate

c.     Preventing and prosecuting tax evasion and other illegal economic activities

d.    Exercising supervision and control over its constituent units

e.     Performing such other functions as may be provided by law.

c.     Taxes Collected by the BIR

1.     Income tax

2.     Estate and Gift Taxes

3.     Excise Taxes

4.     Taxes on Business

5.     Documentary Stamp Tax

6.     Mining Tax

7.     Miscellaneous Taxes, Fees and Charges imposed by NIRC:

a.     Taxes on banks, finance companies, and insurance companies;

b.    Franchise taxes;

c.     Taxes on amusement;

d.    Charges on forest products;

e.     Tobacco inspection  fees;

f.      Such other taxes imposed and collected by the BIR:

Residence taxes

Sugar adjustment taxes

Energy taxes

3.     The Bureau of Customs (BOC)

o    The second major revenue-collection agency of the national government

a.     Organizational Set Up

v  Headed by a commissioner

v  Deputy commissioner

b.    Powers of the BOC

1.     Assessment and collection of the lawful revenues from imported articles and all other dues, fees, charges, fines and penalties accruing under the tariff and customs laws;

2.     Prevention and suppression of smuggling and other frauds;

3.     Supervision and control over the entrance and clearance of vessels and aircraft engaged in foreign commerce;

4.     Enforcement of the tariff and customs laws and all other laws, rules and regulations relating to tariff and customs administration

5.     Supervision and control over the handling of foreign mails

6.     Supervision and control over all import and export cargoes, landed or stored in piers, airports, terminal facilities, including container yards and freight stations for the protection of government revenue;

7.     Exclusive jurisdiction over seizure and forfeiture cases under tariff and customs laws;

8.     And the following,  through the commissioner:

a.     Account ting for all customs revenue collected;

b.    Exercise police authority for the enforcement of tariff and customs laws;

c.     Prosecuting smuggling and other illegal activities in all ports under its jurisdiction;

d.    Supervision and control over its constituent units; and

e.     Performing other functions as may be provided by law

3. MAJOR PHILIPPINE TAXES

1.   INCOME TAX

§  A tax on all incomes earned by individuals and corporations

Salaries

Wages

Honoraria and commissions

Winnings in gambling and lotteries

Dividends

Bank interests

Profits from business

§  Among taxes, income tax best approximate the ability-to-pay principle or the progressivity in taxation, because the income of a person or a corporation is the most apparent indication of his ability to pay

a.     Income Tax of Individuals

o    Levying income tax on a person

CATEGORIES:

∎ Compensation Income – refers to earnings from employment, whether regular or casual, and regardless of whether the employer is the government or a private entity.

∎ Business Income – refers to profits from business operations.

∎ Passive Income – refer to royalties, prizes worth over P3,000, other kinds of winnings and interests of bank deposits, inter alia.

b.   Corporate Income Tax

o    Corporation for purposes of income taxation also refer to partnership, joint accounts, associations and insurance companies.

EXEMPT FROM INCOME TAXES

1.     Labor, agricultural or horticultural organization not organized for profit;

2.     Mutual savings bank not having capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;

3.     Fraternal beneficiary society, order or association, operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under a lodge system and providing for the payment of life, sickness, accident, or other benefits to the members of such society, order or association, or their dependents;

4.     Cemetery company owned and operated exclusively for the benefit of its members;

5.     Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of the net income of which inures to the benefit of any private stockholder or individual;

6.     Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual;

7.     Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

8.     Club organized and operated exclusively for pleasure, for recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any stockholder or member;

9.     Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses;

10.  Farmers’, fruit growers’, or like associations organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of the sales, less the necessary selling expenses, on the basis of the quantity of produce finished by them;

11.  Corporation or association organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the extra amount thereof less expenses, to an organization which is itself exempt from the tax imposed by this Title;

12.  Government educational institution.

2.     TRANSFER TAXES

v  Gratuitous transfer of properties is also taxed.  It is     called estate tax if the property passes to another by inheritance and gift tax if transferred through donation.

3.     VALUE ADDED TAX

v  This is a tax on the privilege of selling merchandise and of importation.

4.     CUSTOM DUTIES  

v  Customs duties are levied on the exportation and importation of goods.  “All imported articles, when imported from any foreign country into the Philippines are subject to duty upon each importation, even through previously exported from the Philippines.”

5.     LOCAL TAXES

v  Under the Local Government Code pursuant to the mandate of the Constitution, local government units are empowered to levy a variety of taxes and other fees. 

6.     REAL PROPERTY TAXES

v  Is assessed on real properties located within the territory of a local government unit in proportion to its value or in accordance with some other reasonable method of apportionment.  Real properties include lands and buildings.

7.     EXEMPTION TAXATION

v  Tax exemption is the grant of immunity to particular persons or corporations from tax.  There are two grounds for grant of exemptions:  contract and reason of public policy.

RECENT DEVELOPMENTs

A.  DEVELOPMENTS UNDER THE MARTIAL LAW REGIME

1.     Organizational Reforms

v  P.D. No. 1 issued under New Society enjoined major revenue agencies to gear their efforts towards development objectives.

v  The decree updated and streamlined the operation of tax collection agencies.

v  It  also provided for a new staffing pattern, intensified and expanded tax function, abolished obsolete divisions, and streamlined the agency functions into two major functional areas – ADMINISTRATION

            OPERATIONS

v  Personnel reforms were directed towards the separation of unfit and erring employees from the service, the adoption of a new staffing pattern with higher salary scales, and the adoption of an intensified training program

v  Creation of industry group audit teams in the BIR facilitated investigation of tax returns through the so-called package audit system.

·         Various types of returns of a taxpayer are investigated simultaneously only once a year.

v  The BIR launched a positive recruitment program for operational positions to augment and reinforce the existing staff which was earlier reduced by the separation of unfit and erring personnel.

2.     Substantive Reforms

a. Tax Amnesties

       P.D.  23 as amended by P.D. 67, 156 and 157

       Imposition of 10% tax on all previously untaxed income or wealth

b. Revision of the Tariff and Customs Code

       The revised Custom Code simplified the system of classification and structure rates

d.    Real Property Tax Developments

       P.D. 76 provided the filing of taxpayers of self-assessed value of their lands and other real properties to enable the government to get an updated listing of property and its current market value

       P.D. No. 464 codified existing real property tax laws

       P.D. No. 231 provided for more taxing power for local governments

e.     Measures to increase revenue and improve tax systems

       Tax measures to increase revenues:

ü  Sec. 192 (3) of the NIRC on dealers of gasoline and petroleum products

ü  Sec. 193 of the NIRC increasing the rates of specific tax on petroleum products

ü  P.D. 1671 imposition of tax on motor vehicles with air conditioning units

ü  P.D. 1686 surtax  on extraordinary gains realized by oil companies on petroleum products

ü  P.D. 1709 increase in specific tax on distilled wines and compound liquors

f.      Gross Income Taxation

1.     Category I Compensation Income

2.     Category II Business Income and Income from Profession

3.     Category III Passive and Other Income

B.  POST EDSA REVOLUTION DEVELOPMENTS

1986 TAX REFORM PACKAGE HIGHLIGHTS

1.   Income Taxes

a.   For Individual Income Taxation

b.   For Corporations

2.   Travel Tax

3.   Export Duties

4.   The Value Added Tax System (E.O. 273)

5.   Reclassification of Excisable Articles (E.O. 273)

6.   Transfer of Collection (E.O. 273)

C.  INCREASE IN REVENUE COLLEC TIONS

ISSUES AND PROBLEMS

1. REVENUE ADMINISTRATION

1.     Lack of tax “handles”

2.     Assessment of Revenue Administration

2.  TAX STRUCTURES

1.     Capital Formation and Allocation of Resources

2.     Redistribution of Income and Wealth

3.       Economic stability